Budget 2016: National Pension Scheme – 40% of withdrawal made tax free!

Published: February 29, 2016 at 12:37 pm

Last Updated on

The finance minister today announced 40% of the lump sum withdrawn from the National Pension Scheme will be made tax-free. A look at the implications of this move and if it makes the NPS more attractive.

The government has done this to ensure tax uniformity between defined benefits (GPF) and defined contributions schemes (NPS). It has now made EPF Contributions from April 2016 taxable!

Note: My understanding: GPF rules remain the same. It continues to be tax-free. By the same token, Govt NPS corpus should also tax-free (official clarification awaited though)

Links for EPF subscribers:

 

Here is full budget speech

Assuming other rules remain the same,

  • 40% of corpus is tax-free (Budget 2016 recommendation) upon withdrawal.
  • rest will be taxed as per slab when withdrawn or can be annuitized (the 40% min annuity recommendation appears to be removed. Require confirmation)

NPS rules:

All Contributions + interest –> 40% EEE + 60% EET (both investment and interest tax free)

Does this make the NPS attractive now?

If you do not mind the lock-in up to age 60 (80% has to be annuitized if withdrawn before) then NPS was always attractive*. Now even more so!

I suggest you use the NPS for your debt component and use stocks and/equity mutual funds for your equity allocation.  You can choose the ‘C‘ option – low duration corporate/bank/psu bonds. Avoid the ‘G‘ option – long-term gilts.

Read more to Ddecide on the asset allocation for a financial goal

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

* Beware: The concept of a locked-in retirement corpus can be quite dangerous.

If the lock-in does not appeal to you stay away from NPS. Personally, I hate lock-in and standby what I wrote earlier:

Remember: NPS investments are mutual fund investments!

Pension is not guaranteed! Returns are not guaranteed! The annuity has to be purchased from an insurer. All you need is money to purchase the annuity. Not NPS! You can get them from anywhere!

Updates 

Should I Now Switch to the National Pension Scheme (NPS)?

EPF Calculator with Budget 2016 Taxation Rules

Budget 2016: Don’t worry -Tax on EPF is quite small!

If you are an existing subscriber, this is great news. Do not invest in NPS because of this announcement.  It ought to be clear enough now that the government cannot make the entire withdrawal tax-free!

Read more: Budget 2016: What should we do now?

PS. This is terrific news for government employees!

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps